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Proposal for a highly liquid Equity Volatility Fund

christophe bagot

on 27 January 2016

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Transcript of Presentation

Highly Liquid Equity and Volatility Options Fund
56% gross performance in 12 months with 13% volatility
Max daily drawdown = 6.54%, max monthly = 1.79%
Peak-To-Valley = 11.06% (17/12/12 - 28/12/12)
Recovery = 13 Days
50% to 75% account margin, 3% to 7% VaR 99% 1 day historical
Skills & Experience
Investment Principles

Proof of Concept and display of Know How
Set up and grew the RBC Equity Derivatives London Desk
Managed large complex portfolios with aggregated notionals > 1 Billion USD and material residual exposures
Managed Funding, Rates and FX risks in addition to the main Equity risks
Leading French "Grande Ecole" and University graduate
Over 10y Equity Derivatives Trading
Societe Generale, Rabobank, BNP Paribas, Royal Bank of Canada
Broad knowledge: Exotic Products, Correlation, Rights Arbitrage ...
Statistically exploit human behaviour displayed in the markets
Outperforming strategies are selling volatility with a long directional bias. Volatility and large total return Equity Index are mean reverting.
Under no deflation, bear markets are less frequent than bull markets, but faster and deeper (2x to 4x).
Upward bounces are sharper after a big drop.
28 Jul 08 = stressed market
17 Nov 08 = panic market
30 Mar 10 = normalized market
Find asymmetric payoffs and exploit temporary decorrelation
Have skin in the game
be a net seller of volatility
have a long bias toward moderate positive monthly returns
mitigate the downside exposure dynamically
The portfolio aims to:
Mitigate drawdowns; control net residual exposure and extreme scenarios
Downside tail risks are real while sharp upward bounces are statistically less common. Bulk of returns is between [-4% and +4%] with "high kurtosis" on the positive side.
VIX is a non storable, mean reverting commodity. The term structure is in contango during quiet times, in backwardation during stressed times.
Trade: Sell long term VIX future, buy short term vega weighted for carry with protection.
Strategies currently implemented on Interactive Broker account.
Market Neutral Target of 30% net return with 15% volatility and 10% max drawdown.
In green the dividend future of the current year, in red the next year rolling. The decorrelation at the beginning of the year and subsequent "pull to realized" is apparent.
Trade: Sell first quarter upside Call on index, delta hedged with long div future.
VIX is negatively correlated to SPX, but reverts quicker and is bound on the lower side. Trade: [long VIX / long SPX] when VIX low, [short VIX / short SPX] when VIX high. Short VIX can be executed via options to cap potential losses.
positive growth beween 0% and 20%
have a positive carry most of the time
enter in asymmetric trades with limited downside and potential bigger upside
concentrate PNL gain in realized legs and PNL losses in unrealized mark to market ones
The portfolio aims to:
Additional discretionary protection during political macro events
Simple close of trades when reaching preset targets and reopening of new reassessed positions
Stress scenarios in addition to the standard historical VaR
Minimum 25% margin cushion in immediately available cash
Close attention to spreads, fees and other costs
Diversification via investment in at least 3 markets
Medium term investment horizons (maturities<1year)
Limit the number of open positions
Only listed instruments within high liquidity range (theoretical portfolio liquidation in less than 12h)
Systematic buyback of non covered small premiums (< 10 bps) or very short term (< 1 week) options
Systematic system; proprietary indicators; discretionary trading
Portfolio is permanently invested in core medium term (3 months to 1 year) carry strategies.
These are rolled periodically (maturities) and dynamically (strikes) to maintain balance.
VaR allocation depends on return target, volatility level, carry efficiency, market regime, etc.

Shorter term (1 to 2 months) directional strategies are added, mostly on the upside.
VaR allocation depends on spot velocity, volatility and skew levels, investors sentiment, etc.

Potential protection trades are prepared every day both on the upside and downside.
Trades trigger when market or portfolio risk indicators reach preset targets.

On all trades, several structures are compared to select the best expected risk reward given the portfolio risks and market conditions. Trades number typically range from 5 to 50 a week.
+44 (0) 7858 222 887
50% risk reduction at -3% performance
Total exit at -4.5% performance
500Mio USD notional basis
200Mio USD notional basis
30Mio USD notional basis
Diversification to additional indices for increased liquidity and robustness.
Cash automate to reduce flash drawdowns.

50% to 75% Margin to Capital (as defined by Interactive Broker Portfolio Margin requirements)
>30% gross performance
10% max drawdown
Sharpe Ratio > 2
Trading can begin immediately mirroring my current portfolio, with execution possible entirely electronically.

50% to 75% Margin to Capital
5% of performance invested in additional tail risk control given the loss of nimbleness with size
>25% gross performance
8% max drawdown
Sharpe Ratio > 2
For best execution and liquidity, large proportion of trades executed via banks/brokers and give up.
12% gross performance
2.9% max drawdown
Sharpe Ratio > 2
Implementation within a Multi Strategy Fund Framework with commonly used limits
Full transcript